N I R P

[A.steve]

What can be worse than the LONGEST (or at least way-prolonged) recession of the last century?

The point I was trying to make is that while the media has presented a dire economic picture, the real people I've heard about all thought Japan is/was great... with a fantastic quality of life. Maybe all the anecdotes that reach me are biased or flawed in some way... but it makes me wonder... having never been there - and being unable to speak the language.

[babesagainstmachines]

What can be worse than the LONGEST (or at least way-prolonged) recession of the last century?

Pssst. I'll tell you a secret. We don't need all that shit that the "economy" provides.

Don't tell anyone....

[Guest The Foreigner]

The great depression of the 1930s?

Back then their greed and gamble was limited by their a)OWN pockets and b)by the size of those pockets.

This time around they a) gambled away banks' money and b)by means of securitised debt and derivative instruments there was no limit to "exposure" and losses.

This is why in my personal opinion 1930s is a benchmark we will surpass. Securitizations and SPV/SIVs are the reason for that surpassing.

Edited December 5, 2008 by The Foreigner

[Bloo Loo]

Back then their greed and gamble was limited by their a)OWN pockets and b)by the size of those pockets.

This time around they a) gambled away banks' money and by means of securitised debt and derivative instruments there was no limit to "exposure" and losses.

This is why in my personal opinion 1930s is a benchmark we will surpass. Securitizations and SPV/SIVs are the reason for that surpassing.

Id better get out and stockup on some monochrome film for my cameras then.

[Guest The Foreigner]

The point I was trying to make is that while the media has presented a dire economic picture, the real people I've heard about all thought Japan is/was great... with a fantastic quality of life. Maybe all the anecdotes that reach me are biased or flawed in some way... but it makes me wonder... having never been there - and being unable to speak the language.

They had happy lifes while the rest of the global economy was booming and buying their exports - deflation was contained within one country with export-geared economy.

Things are very different in US and UK today and the rest of the developed world as we know it is in recession.

[A.steve]

Back then their greed and gamble was limited by their a)OWN pockets and b)by the size of those pockets.

This time around they a) gambled away banks' money and b)by means of securitised debt and derivative instruments there was no limit to "exposure" and losses.

This is why in my personal opinion 1930s is a benchmark we will surpass. Securitizations and SPV/SIVs are the reason for that surpassing.

I too think that the numbers will be bigger this time (even relative to GDP) but I am not expecting more dire consequences. It is, actually, derivative instruments that lead me to expect a reduced impact - bankrupt is bankrupt by £1 or £10bn. I think that derivatives will concentrate losses in such a way as to prevent recovery of debts... and I think this will form the break on deleveraging... eventually.

The issues with securitized debt are interesting, too. The point here is that they can default... thus evaporating the apparent advantage that the rich have over the poor. I see nothing negative whatsoever in collapsing asset prices... it reflects only a shift in the balance of power from the rich to the less rich. It wasn't only the borrowers who over-leveraged - it was the lenders too... both deserve everything that is coming to them. As long as this doesn't trigger a war or riots there is no overall loss... we have the same material possessions as before; we have the same intellectual talent; we have the same natural resources; the same religious beliefs and convictions (except, maybe, if you consider debt-fuelled-consumption a religion). All that we're talking about doing is establishing a new way to account for wealth and to measure future payments. If you give more than you take - I expect you will become richer; if you take more than you give - the converse. It's nothing to be scared about.

[A.steve]

They had happy lifes while the rest of the global economy was booming and buying their exports - deflation was contained within one country with export-geared economy.

Things are very different in US and UK today and the rest of the developed world as we know it is in recession.

Fair enough... but is the current problem a consequence of quantitative easing by Japan - or is it an external shock for them?

[batthink]

Back then their greed and gamble was limited by their a)OWN pockets and b)by the size of those pockets.

I thought a massive amount of leverage was taken out back then as well., credit was easy - then the debt was called. Simplified obviously, but leverage as of today was apparent.

And

Is this strictly true? The bank could just as easily sit on treasuries and not repo them, couldn't it?

Well then you are *not* talking about excess reserves? This NIRP idea seems quite simple, and effective, to me

[Guest The Foreigner]

I too think that the numbers will be bigger this time (even relative to GDP) but I am not expecting more dire consequences. It is, actually, derivative instruments that lead me to expect a reduced impact - bankrupt is bankrupt by £1 or £10bn. I think that derivatives will concentrate losses in such a way as to prevent recovery of debts... and I think this will form the break on deleveraging... eventually.

The issues with securitized debt are interesting, too. The point here is that they can default... thus evaporating the apparent advantage that the rich have over the poor.

Banks lost, hedge funds made money. Rich invested in hedge funds and made money out of it.

Banks' losses are propt up by your - taxpayers - money. Taxpayer=middle class=poor. Poor getting poorer, rich richer. The flow of cash in a simplified way is from Taxpayer to Banks to Hedge Funds to HNW individuals.

The gap between poor and rich in UK and US is the widest ever since WW2 and has widened more than ever in the last 10 years.

The middle class is diluted/impoverished/emigrating. No middle class-no social peace. Back to your point on riots now..

Edited December 5, 2008 by The Foreigner

[JimSkank]

I too think that the numbers will be bigger this time (even relative to GDP) but I am not expecting more dire consequences. It is, actually, derivative instruments that lead me to expect a reduced impact - bankrupt is bankrupt by £1 or £10bn. I think that derivatives will concentrate losses in such a way as to prevent recovery of debts... and I think this will form the break on deleveraging... eventually.

The issues with securitized debt are interesting, too. The point here is that they can default... thus evaporating the apparent advantage that the rich have over the poor. I see nothing negative whatsoever in collapsing asset prices... it reflects only a shift in the balance of power from the rich to the less rich. It wasn't only the borrowers who over-leveraged - it was the lenders too... both deserve everything that is coming to them. As long as this doesn't trigger a war or riots there is no overall loss... we have the same material possessions as before; we have the same intellectual talent; we have the same natural resources; the same religious beliefs and convictions (except, maybe, if you consider debt-fuelled-consumption a religion). All that we're talking about doing is establishing a new way to account for wealth and to measure future payments. If you give more than you take - I expect you will become richer; if you take more than you give - the converse. It's nothing to be scared about.

Nice post

[Guest The Foreigner]

Banks lost, hedge funds made money. Rich invested in hedge funds and made money out of it.

Banks' losses are propt up by your - taxpayers - money. Taxpayer=middle class=poor. Poor getting poorer, rich richer. The flow of cash in a simplified way is from Taxpayer to Banks to Hedge Funds to HNW individuals.

The gap between poor and rich in UK and US is the widest ever since WW2 and has widened more than ever in the last 10 years.

The middle class is diluted/impoverished/emigrating. No middle class-no social peace. Back to your point on riots now..

[Extradry Martini]

Is this strictly true? The bank could just as easily sit on treasuries and not repo them, couldn't it?

Yes, but as I said in my original post, restricitons to treasury purchases could always be imposed. Actually, I don't even think this would be necessary. Banks buying treasuries in the secondary market means more money going elsewhere - as the sellers of the treasuries would be putting cash to use somewhere else.

[Extradry Martini]

Quantitatuve Easing in nearly 10 years to date has done nothing to pull Japan out of deflation.

Why should it then work in US and UK?

If you read my original post, you'll see how.

[Extradry Martini]

The banks may be convinced this way by the Central Bank to lend to me - a end-borrower. But I do not want their mortgage today - I am waiting for a minimum 50% fall in any assets (icl. houses). I may not be waiting for a fall but I have no job to repay a mortgage/loan (redundancies in US running at 533k a month). What will the banks do with that liquidity if none wants it.

That is exactly what happened in Japan. Don't even mention their house prices over the last 10 years - flat or down. And they are even "smaller" island than this one.

If the banks are incentivised to lend, they won't find any shortage of borrowers, you need not worry about that. The whole crisis is one of people suddenly and abruptly finding themselves short of capital.

[Extradry Martini]

Pssst. I'll tell you a secret. We don't need all that shit that the "economy" provides.

Don't tell anyone....

Like food, water, medicine, housing or energy?

[Extradry Martini]

Back then their greed and gamble was limited by their a)OWN pockets and b)by the size of those pockets.

This time around they a) gambled away banks' money and b)by means of securitised debt and derivative instruments there was no limit to "exposure" and losses.

This is why in my personal opinion 1930s is a benchmark we will surpass. Securitizations and SPV/SIVs are the reason for that surpassing.

I think you need to do a little reading up on your subject matter if ou think that leverage had no part to play in the Great Depression, or if you think that this is the first banking crisis. This crisis is no different from any of the other ones in nature - it was caused by good old fashioned over-lending and leveraged speculation, same as always. Derivatives played a very minor role in it.

[Guest The Foreigner]

If the banks are incentivised to lend, they won't find any shortage of borrowers, you need not worry about that. The whole crisis is one of people suddenly and abruptly finding themselves short of capital.

... AND SHORT OF JOBS...AND SHORT OF BULLISH MENTALITY OF ASSET PRICES GOING ONE WAY

The point of no return is when confidence in asset prices is lost even without job losses and none is interested in borrowing. Are we at that point now? I believe so.

[Extradry Martini]

That's lending to the government, isn't it?

Just to follow up on my earlier response to this: I guess the point is that QE cannot work if all that happens is that the banks just deposit the money back with the central bank as that mwans that there has been no new money injected into the economy. If Banks instead buy treasuries with the money, then the new money is out there and not back with the c/b and therefore effectively destroyed once more.

[Extradry Martini]

... AND SHORT OF JOBS...AND SHORT OF BULLISH MENTALITY OF ASSET PRICES GOING ONE WAY

The point of no return is when confidence in asset prices is lost even without job losses and none is interested in borrowing. Are we at that point now? I believe so.

I think the level of asset prices is not very important here. This isn't about the feel-good factor, it's about businesses not folding and people not having their houses repossessed because of a sudden lack of capital. You cannot have a working economy where the banks are not operating.

[Guest The Foreigner]

I think you need to do a little reading up on your subject matter if ou think that leverage had no part to play in the Great Depression, or if you think that this is the first banking crisis. This crisis is no different from any of the other ones in nature - it was caused by good old fashioned over-lending and leveraged speculation, same as always. Derivatives played a very minor role in it.

I did not say there was no over-lending or leveraged speculation in 1930s. What made a difference this time around is securitising debt, placing it into off-balance sheet SPV/SIVs leading to loss of lender-borrower relationship and then, squering and cubing ever deteriorating quality debt and "exposing" oneself to it without owning it.

You may also whish to read Hyman Minsky and Austrian model.

Edited December 5, 2008 by The Foreigner

[bobthe~]

Back then their greed and gamble was limited by their a)OWN pockets and b)by the size of those pockets.

This time around they a) gambled away banks' money and b)by means of securitised debt and derivative instruments there was no limit to "exposure" and losses.

This is why in my personal opinion 1930s is a benchmark we will surpass. Securitizations and SPV/SIVs are the reason for that surpassing.

I am not arguing that point.

I thought the point you were making was about Japan being the worst in the last century, whereas I would say from a human misery point of view there isn't really much contest.

[A.steve]

Yes, but as I said in my original post, restricitons to treasury purchases could always be imposed. Actually, I don't even think this would be necessary. Banks buying treasuries in the secondary market means more money going elsewhere - as the sellers of the treasuries would be putting cash to use somewhere else.

Hmmm - it seems to me that all the moves are to have banks own more treasuries - not less...

I don't think the trend would be for banks to buy treasuries on the open market from, say, pension funds... but rather to keep treasuries on their balance sheet rather than repoing them with the central bank.

[Minderbinder]

Is forcing banks to buy treasuries an attempt to prevent problematic bond auctions? Is it a way of keeping yield down?

[tiggerthetiger]

QUOTE (A.steve @ Dec 5 2008, 04:30 PM)

I too think that the numbers will be bigger this time (even relative to GDP) but I am not expecting more dire consequences. It is, actually, derivative instruments that lead me to expect a reduced impact - bankrupt is bankrupt by £1 or £10bn. I think that derivatives will concentrate losses in such a way as to prevent recovery of debts... and I think this will form the break on deleveraging... eventually.

The issues with securitized debt are interesting, too. The point here is that they can default... thus evaporating the apparent advantage that the rich have over the poor. I see nothing negative whatsoever in collapsing asset prices... it reflects only a shift in the balance of power from the rich to the less rich. It wasn't only the borrowers who over-leveraged - it was the lenders too... both deserve everything that is coming to them. As long as this doesn't trigger a war or riots there is no overall loss... we have the same material possessions as before; we have the same intellectual talent; we have the same natural resources; the same religious beliefs and convictions (except, maybe, if you consider debt-fuelled-consumption a religion). All that we're talking about doing is establishing a new way to account for wealth and to measure future payments. If you give more than you take - I expect you will become richer; if you take more than you give - the converse. It's nothing to be scared about.

Nice post

This is a long thread...and I agree with Jim the sentiments expressed in that particluar post are extremely incisive !!

Edited December 5, 2008 by tiggerthetiger

[Extradry Martini]

Is forcing banks to buy treasuries an attempt to prevent problematic bond auctions? Is it a way of keeping yield down?

No, they wouldn't be forced to buy treasuries. I am saying that even if they used their excess reserves to buy treasuries in the secondary market, it still means that more money is in the system than if they had left it in the form of excess reserves at the Fed.